Over the YTD, near-term bond yields have remained highly elevated, except for a brief period in the first month of Q2 wherein a picture of normalcy was nearly painted after the yield of 1-month bonds slipped below that of mid- and long-term bonds. In the period since and until the 26th of May (a Friday), yields of 1-month bonds had sky-rocketed to the highest levels seen in the year so far. Since then, while there has been a climb down, the steepness of the decline has pared off last week towards a gentler decline while still being significantly elevated above that of longer-term bonds. This affirms the market’s conviction that a recession is imminent (a conviction that has been expressed in most of the articles written in the year so far). What’s telling, however, is that the mid-term bonds, i.e. those with 5- and 7-year maturities, should have a lower yield imputed than those of longer-term bonds. A peculiar form of curve inversion is apparent: while the 10-year bonds have the lowest yields of the whole pack, the 20- and 30-year bonds have a higher yield, with the 20-year leading over the 30-year and with both higher than the 5- and 7-year bonds.

So, market consensus could be summarized thus: the U.S. economy in a 20-year horizon is more uncertain than the 30-year horizon but is less uncertain in the 5- and 7-year horizons. Of the two, the 5-year horizon is more uncertain than the 7-year horizon. However, the U.S. economy is the least uncertain in the 10-year horizon.

Intuitively, this is a highly dysfunctional picture; economies cannot be expected to turn and reverse course on a dime in such a fashion. What’s apparent, however, in the current month is that both mid- and long-term bond yields are beginning to converge, most likely toward the 4.25-4.5 range. Combining this likely convergence with the fact that short-term issuances will likely continue to attract a high yield in the near future delivers a more meaningful outlook: bond investors seem to be of the consensus view that the likelihood of the U.S. remaining the world-leading economic engine is remote.

The shape of the yield curve is also influenced by supply and demand: for instance, if long-term bonds are in demand with not enough bonds available to meet the fixed liabilities of the likes of pension funds (who tend to be large-scale buyers), the yields on long-term bonds will trend low while prices rise. The low yield imputed on the 10-year bond is likely due to it becoming an increasingly preferred choice for long-dated exposure over the 20- and 30-year bonds.

Overall volume and price trajectories in the iShares 20+ Year Treasury Bond ETF (TLT) – which hold the longer-term bonds – however, run counter to this phenomenon: